Competitioninthe
distributionof
medicines
October 2016
PAGE 2
CHAPTER 1 SUMMARY AND RECOMMENDATIONS
Competitioninthedistributionofmedicines
DanishCompetitionCouncil
Danish Competition and Consumer Authority
Carl Jacobsens Vej 35
DK-2500 Valby
Tel.: +45 41 71 50 00
Email: [email protected]
Online ISBN 978-87-7029-636-6
Report made by
the Danish Competition and Consumer Authority
on behalf of the Danish Competition Council
October 2016
PAGE 3
Chapter 1
Summaryandrecommendations
1.1 Backgroundtoanddelimitationofthereport
Most Danes come into contact with the healthcare sector and the pharmaceutical market. In
2015, more than 4 million Danes bought prescription medicines while almost 2.7 million
received hospital treatment in 2014.
The pharmaceutical market
has major economic and
health-related significance
In 2014, Denmark’s expenditure on medicines amounted to DKK 21.4 billion, corresponding to
slightly more than 1 per cent of GDP. In 2014, the primary sector (mainly privately-owned
pharmacies) sold medicines to consumers worth DKK 11.8 billion, of which DKK 5.6 billion
was reimbursed by the public sector while public-sector expenditure on medicines at
hospitals amounted to DKK 9.6 billion.
Overall, the pharmaceutical market has three distribution channels, see figure 1.1: Suppliers,
wholesalers and ‘retailers’. Suppliers develop and manufacture medicines while wholesalers
distribute the medicines from the suppliers to the ‘retailers’. ‘Retailers’ can be divided into
two channels: pharmacies selling medicines to consumers and hospitals redistributing
medicines to patients. This report focuses on competition in the distribution of medicines
from suppliers to pharmacies and hospitals.
Figure 1.1 Distributionchannelsinthepharmaceuticalmarket
Note: Suppliers are parallel importers and manufacturers who develop, manufacture and supply medicines while wholesalers
are both pre-wholesalers, who handle stocks and distribution for suppliers, or ‘traditional’ wholesalers, who buy medicines
from suppliers and resell, and pure distributors.
Source: The Danish Competition and Consumer Authority
International studies show
that Danish pharmacy
customers pay high prices for
patented medicines
All distribution channels on the path to the consumers are, to a greater or lesser extent,
subject to market powers and are therefore in a position to charge higher margins, which
must be expected to feed through, fully or partly, to higher pharmaceutical prices for the
consumers.
International studies show that Danish pharmacy customers pay fairly high prices for
patented medicines. Original medicines (which also comprise patented medicines) make up
59 per cent of sales by pharmacies. Conversely, consumer prices of generic medicines are
fairly low compared with prices abroad. Generic medicine sales account for 14 per cent of
pharmacy sales (and 51 per cent of the total volume of medicine sales).
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CHAPTER 1 SUMMARY AND RECOMMENDATIONS
The low prices of generic medicines in Denmark reflect to some extent the competition among
suppliers of medicines to pharmacies arising from the so-called 14-day fixed-price periods
(auction system). Every 14 days, all suppliers must report prices to an auction system, after
which pharmacies must offer customers the least expensive product in a group of
substitutable products. The effect of the system on prices of patented medicines, for which no
direct substitutes exist, is less pronounced as these products are either not exposed to
competition at all or only to a limited extent from parallel imported original products.
The pharmaceutical market
is subject to extensive
regulation
The pharmaceutical market differs from other retail markets in being subject to extensive
regulation. The regulation aims to take a number of social issues into account, including
healthcare issues such as supply reliability, quality and transparency as well as ensuring that
public expenditure on medical reimbursements and medicines used at hospitals are kept
under control.
The Danish Competition and Consumer Authority/the Danish Competition Council
(Konkurrencerådet) have previously called attention to competition issues in the
pharmaceutical market, such as in a report on the pharmacy sector (2010) and in a request
made to the Danish Minister of Health and the Danish Minister for Business and Growth
(2012) under section 2(5) of the Danish Competition Act (konkurrenceloven), and in a
competition case concerning wholesalers supplying pharmaceutical products to pharmacies
(2014). Moreover, the European Commission has conducted several competition cases against
pharmaceutical suppliers who have illegally attempted to restrict competition in order to
promote sales of own products.
The report on the pharmacy sector and the section 2(5) request concluded that the regulation
of the pharmacy sector substantially restricts competition in the market for pharmacy
services: The regulation of the pharmacy sector restricts access to the market, eliminates price
competition and provides only limited incentive for pharmacies to compete on customer
services. The regulation was eased with effect from 1 June 2015 and enabled pharmacies to
set up, move or close down pharmacy branches or outlets within a range of 75 kilometres
from the pharmacy. As a result of the new rules, the number of prescription dispensing units
has increased and, as a result, availability and competition have been strengthened to some
extent.
The analysis made in this report particularly focuses on competition among wholesalers in the
distribution of medicines for the treatment of human beings, that is, both prescription
medicines, over-the-counter (OTC) medicines sold by pharmacies only, liberalised OTC
medicines and medicines for hospitals only. Basically, wholesalers are defined as enterprises
involved in the distribution of medicines from suppliers to retailers.
The analysis measures competition
and offers recommendations of how
to strengthen competition
The analysis measures competition among wholesalers, illustrates factors impacting
competition and offers recommendations of how to strengthen competition.
The wholesale market cannot be considered in isolation from the retail and supplier markets.
In consequence, factors impacting the other distribution channels in the pharmaceutical
PAGE 5
market, that is, suppliers, pharmacies and hospitals, are also taken into account if they are
1
deemed to be of significance to the competition among wholesalers.
Strengthening of competition in the distribution of medicines could entail lower consumer
prices, lower public healthcare expenditure, higher productivity, increased availability and
improved customer service.
1.2 Keyfindingsofthereport There are marked differences in the regulation, framework conditions and market structures
of wholesalers supplying medicines to pharmacies and hospitals, respectively. This is reflected
in huge differences in the competitive environment of the two wholesale markets.
Competition in the
distribution of medicines to
pharmacies could become
more effective
The distribution of medicines to pharmacies is subject to limited competition. The market is
strongly regulated and the market structure is characterised by two major wholesalers having
handled almost all supplies for a number of years. Therefore, competition in the market can be
strengthened.
The distribution to hospitals
does not appear to be exposed
to competitive challenges to
the same extent
Competition in the distribution of medicines to hospitals does not appear to be exposed to
competitive challenges to the same extent as the distribution to pharmacies. The number of
wholesale suppliers to hospitals is higher (at least seven at the moment) and market shares of
wholesalers fluctuate fairly strongly. In addition, many suppliers prefer to handle the
distribution themselves. Wholesalers of medicines to hospitals largely compete on low prices
in order to be selected by the pharmaceutical suppliers. Furthermore, suppliers regularly
change their wholesaler. In the past five years, new wholesalers have entered the market and
several business models for the distribution are being applied. Finally, margins on the
distribution to hospitals are sharply lower than margins on the distribution to pharmacies,
possibly reflecting the more limited competition in the distribution of medicines to
pharmacies. It should be emphasised that competition among suppliers of medicines to
hospitals has not been analysed in this report. The conclusion only concerns the distribution of
medicines.
Moreover, our analysis places particular emphasis on the distribution of medicines to
pharmacies and our recommendations are made specifically in respect of this part of the
distribution.
Two wholesalers account for
[95-100] per cent of the
distribution of medicines to
pharmacies
Competitioninthedistributionofmedicinestopharmaciescanbemademoreeffective
Today, the wholesale enterprises Nomeco and Tjellesen Max Jenne (TMJ) account for [95-100]
per cent of the distribution of medicines to Denmark’s 234 pharmacies and 158 branches, etc.
Both wholesalers provide the pharmacies with a full range of medicines (and are referred to
as ‘full-line wholesalers’ in this report). Both Nomeco and TMJ are part of international groups
operating in the wholesaling market in 25 and 14 countries, respectively.
The remaining share of the medicines supplied to pharmacies, [0-5] per cent, is supplied by
PharmaService, a Danish family-owned wholesale enterprise selling medicines from selected
suppliers.
__________________
1
Grocery stores are allowed to sell liberalised OTC medicines to consumers. The distribution of OTC medicines to grocery stores
is not taken into account in the report. Grocery stores carry a limited number of the overall range of medicines and their sales
only account for a minor share of primary sector sales (less than 5 per cent).
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CHAPTER 1 SUMMARY AND RECOMMENDATIONS
Pharmacies can freely choose their wholesaler and also whether they prefer to use one or
several wholesalers. However, under Danish legislation, pharmacies must be able to offer all
approved medicines to their customers. Nearly all pharmacies use one of the full-line
wholesalers as their primary wholesaler, from whom they buy almost all their medicines.
Nomeco acts as primary wholesaler for two thirds of the pharmacies while TMJ acts as
primary wholesaler for one third of them, see figure 1.2.
Figure 1.2 Distributionofmedicinestopharmacies
Note1: The figure covers 97 per cent of the distribution to pharmacies; the remaining 3 per cent of the medicine sold by
pharmacies covers magistral medicines and vaccines from Statens Serum Institut.
Note2:Nomeco’s and TMJ’s revenue also includes any sales to other market players than pharmacies, such as hospitals and
retailers. Total procurement by pharmacies account for DKK 8 billion. TMJ’s sales have been adjusted for a 2014/2015 financial
year covering 15 months.
Source: Total Sales of Medicines in Denmark, 2010-2014, Table 1, published by the Danish Health Data Authority. The financial
statements of Nomeco and TMJ.
Suppliers of medicines to
Danish pharmacies find it
difficult to bypass the two
wholesalers
New wholesalers have failed
to establish a foothold in the
market
As pharmacies purchase nearly all their medicines from their primary wholesaler, suppliers
wishing to sell medicines to Danish pharmacies cannot, in practice, bypass the two full-line
wholesalers as trading partners. All suppliers of medicines to pharmacies have business
relations with both full-line wholesalers. The terms and conditions as well as payments from
suppliers to wholesalers for the distribution of medicines to pharmacies are negotiated by the
supplier and the wholesaler. The margins charged by the two wholesalers for distributing the
suppliers’ medicines to pharmacies only vary slightly.
No new wholesale enterprises or new business models for the distribution of medicines to
pharmacies have managed to establish a foothold in the market in the past ten years. Several
enterprises have made unsuccessful attempts to gain access to the market using the direct-topharmacy business model (PharmaChange and Pharmadirect). Under the direct-to-pharmacy
model, the wholesaler only handles logistics, but does not own the product. The direct-topharmacy model is used in countries such as the Netherlands, the UK and Italy and accounts
for 10 per cent, 10 per cent and 20 per cent, respectively, of their medicines distribution.
PAGE 7
In Denmark, suppliers hesitate to try out wholesalers using other business models than the
one applied by the full-line wholesalers. As an example, PharmaChange and Pharmadirect
have found it difficult to obtain agreements with suppliers, which is crucial to gaining access
to the market.
Onlymoderatefluctuations
inwholesalers’market
shares
Pharmacies stay with their
primary wholesaler
The market shares of wholesalers have fluctuated less in Denmark than in comparable
countries in the past ten years. This is seen both in countries in which, like in Denmark,
vertical integration is not allowed, i.e. that wholesaler and pharmacy have the same owner
(France, Italy and Germany), and in countries in which vertical integration is allowed
(Belgium, the Netherlands, Norway, the UK and Sweden).
Fairly few pharmacies change their primary wholesaler. All in all, 18 per cent of the
pharmacies (38) decided to change their primary wholesaler at least once in the period 20102015. This means that, every year in the past six years, 2-4 per cent of the pharmacies changed
their primary wholesaler. 38 per cent of the pharmacies did not consider changing their
wholesaler. Still, many pharmacies experience competition between the two full-line
wholesalers and the pharmacies are basically satisfied with their current wholesaler.
However, in the pharmacies’ experience, the wholesalers mainly compete on services offered
to pharmacies, such as stock management and ordering of products (and not on price).
In the period 2005-2014, total earnings generated by wholesalers exceeded those of
wholesalers in countries which, like Denmark, do not allow vertical integration between
wholesalers and pharmacies. High earnings may indicate weak competition.
Wholesale margins are
lowest on the distribution of
low-price products
Denmark is somewhat mid-range when wholesale margins on individual pharmaceutical
products (measured as sales price/purchase price) are compared with those of other EU
countries. However, Danish wholesale margins vary across the range of medicines depending
on whether they are original, generic or parallel imported products. Wholesale margins on
medicines delivered to pharmacies in generic packaging are significantly lower than those on
parallel imported medicines, while margins on original medicines are somewhere in between.
The fact that wholesale margins are lowest on low-price products may provide undesirable
incentives for wholesalers to aim for more expensive products.
Competitioninthedistributionofmedicinestopharmaciesisweakenedbyregulation
andmarketstructure
The weakened competition in the distribution of medicines to pharmacies may reflect factors
2
restricting (price) competition among wholesalers in the market and factors constituting
barriers to entry for new players/business models. In addition, the extensive regulation of the
pharmacy sector contributes to weaker competition among wholesalers in that it dampens the
incentives of pharmacies to scan the market and place orders where they obtain the most
favourable combination of price and service. The limited pressure from pharmacies underpins
the potential of wholesalers and suppliers for charging high prices.
The scope for price competition among wholesalers is limited by public-sector regulations
which, in practice, prevent wholesalers from competing on the medicine prices offered to
pharmacies and on the discounts granted on the medicines.
__________________
2
In 2014, the Danish Competition Council ordered Nomeco and TMJ to stop fixing fees and other business conditions if they had
not already stopped doing so. The Council found that the two enterprises had restricted competition by announcing identical
rules of returns and repayments of medicines to all suppliers of medicines in the Danish market.
PAGE 8
Pharmacy purchase prices
(PPP) of medicines are the
same irrespective of which
wholesaler the pharmacy
uses
Nomeco and TMJ apply
largely identical standard
delivery and discount terms
CHAPTER 1 SUMMARY AND RECOMMENDATIONS
The regulation means that the medicine prices paid by pharmacies must be the same
irrespective of which wholesaler the pharmacy uses. In consequence, wholesalers cannot
attract/retain pharmacies as customers by lowering their medicine prices.
The regulation also implies that wholesalers can only offer discounts to pharmacies on
medicines if the pharmacies exhibit a behaviour that entails direct cost savings for the
wholesaler (so-called cost-based discounts). Accordingly, wholesalers have very limited scope
for offering discounts with a view to gaining market shares. Further, wholesalers must publish
cost-based discounts offered on medicines (duty to display information).
A review of the full-line wholesalers’ standard delivery and discount terms show that they are
largely identical for the two enterprises. This appears not only to reflect costs and cost
structures and thereby indicates that the duty to display information determines the standard
delivery and discount terms, the use of which as a competition parameter is therefore limited.
At the same time, the legal requirement of cost-based discounts contributes to reducing the
scope of wholesalers for offering discounts and, thereby, competing on price. And in the
pharmacies’ experience, the wholesalers do not compete on cost-based discounts. Therefore,
in practice, the price competition on medicines among wholesalers appears to be suspended.
In practice, the lack of scope for competing on price creates barriers to entry for new market
players who are unable to attract pharmacies by competing on price, which is typically a key
competition parameter in a market.
The fixed medicine prices (combined with the limited scope for offering discounts) also create
barriers to entry for new business models for the distribution of medicines as it renders it
difficult for wholesalers to offer pharmacies alternative combinations of price and service that
could be more effective and of greater value to consumers.
A significant share of the wholesalers’ cost-based discounts are based on revenue (the product
of price multiplied by volume sold). In consequence, pharmacies are offered larger discounts
on high-price products, and large pharmacies have better scope for obtaining larger discounts
(and thereby higher earnings) than small pharmacies. Given that a significant number of
discounts are based on revenue and not, for instance, on the number of deliveries, order
frequency or packaging, it is questionable whether the discounts offered by wholesalers are in
fact cost-based (that is, whether they really reflect a behaviour by the individual pharmacy
3
that entails direct cost savings for the wholesaler).
In practice, discounts
reduce the incentives of
pharmacies to try out other
wholesalers
The way the discounts of the two full-line wholesalers have been designed acts to diminish the
incentive of pharmacies to try out other wholesalers or to buy some of their medicines from
other (short-line) wholesalers. The main reason is that it will be fairly expensive for other
wholesalers to compensate the pharmacies for missing out on discounts from the full-line
wholesalers if the pharmacies use another wholesaler for part of their medicine supplies. In
addition, due to a variety of terms and conditions, the discount systems may not be entirely
transparent. Accordingly, the design of the discounts offered by the two full-line wholesalers
may contribute to creating barriers to entry for new wholesalers in the market.
__________________
3
It is observed that a cross-ministerial working group under the Ministry of Health (Sundheds- og Ældreministeriet) will focus on
the issue of whether the discount types received by pharmacies from medicines wholesalers have an impact on the impartiality
of pharmacies in connection with purchasing and dispensing of medicines. As part of the task, the various discount types will be
mapped and assessed. The report of the working group is expected to be ready in 2016
PAGE 9
The general requirement of
cost-based discounts
renders it difficult for new
and small wholesalers to
offer competitive discounts
Also, the general legal requirement of cost-based discounts may, per se, create barriers to entry
for new/small (short-line) wholesalers. The reason is that, all else equal, new/small
wholesalers have to offer even higher discount rates than full-line wholesalers in order to
compensate pharmacies for missing out on discounts from full-line wholesalers. This is hardly
possible without violating the legal requirement of cost-based discounts as small wholesalers
do not enjoy the same economies of scale in distribution as large wholesalers and, in
consequence, will find it difficult to offer larger cost-based discounts than the full-line
wholesalers.
As price competition among wholesalers is ruled out in practice, service and logistics quality
are key competition parameters for wholesalers eager to win pharmacies as customers.
Wholesalers’ competition on
service and logistics quality
results in very close
collaboration between
pharmacies and
wholesalers
As wholesalers mainly compete on service and logistics quality, very close collaboration is
established between the individual pharmacy and its full-line wholesaler. In many cases, the
collaboration is so close that it resembles a de facto vertical integration. The existing close
relations between pharmacies and wholesalers may contribute to streamlining existing work
procedures of wholesalers and pharmacies but, as mentioned, those relations create high
barriers to entry for new wholesalers eager to penetrate the market.
Eventually, wholesale
services are financed by
pharmacy customers and
public medical
reimbursements
Today, full-line wholesalers undertake specific service tasks for pharmacies, such as the
ordering and returning of products and stock management. Wholesalers undertake service
tasks for pharmacies without receiving any (explicit) payment or by offering pharmacies
discounts on medicines. Eventually, this service is financed through medicines prices, i.e. the
consumers, and medical reimbursements by the public sector.
The regulation involving 14day fixed-price periods and
generic substitution creates
preferences for full-line
wholesalers and furthers
close collaboration between
wholesalers and pharmacies
Wholesalers’ IT solutions
are decisive for pharmacies’
choice of supplier
It is difficult and costly for
new wholesalers to develop
IT systems that cater for
pharmacies
By allowing wholesalers to handle the ordering of products and stock management,
pharmacies avoid the major logistic challenges following from the 14-day fixed-price periods
(including the substitution system and the full-range requirement) under the pharmacy
regulation. The 14-day fixed-price periods entail that the pharmacies’ purchase and sales
prices and part of their actual range (and demand) change every 14 days. Accordingly, the
regulation of 14-day fixed-price periods supports the close collaboration between pharmacies
and wholesalers.
The 14-day fixed-price periods also contribute to creating a preference for full-line
wholesalers and close relations between wholesalers and pharmacies because the entire
supply of products and the logistics can be organised by one wholesaler. To 74 per cent of
pharmacies, it is of major or decisive importance that their primary wholesaler carries a full
range. This renders it difficult for wholesalers other than full-line wholesalers to gain a
foothold in the market and, accordingly, creates barriers to entry for new wholesalers and
new business models in the market.
The wholesaler’s IT solutions play a pivotal role for the delivery of services to pharmacies.
More than 90 per cent of pharmacies state that the wholesaler’s overall IT solutions for the
ordering of products and stock management are of major or decisive importance to their
choice of primary wholesaler. In consequence, a new wholesaler must be able to offer wellfunctioning IT solutions in order to attract pharmacies as customers.
Wholesalers who have previously attempted to penetrate the market have called attention to
the fact that it is technically difficult and costly for new wholesalers to develop IT solutions
that can be integrated/exchange data with the IT systems of pharmacies. Add to this that the
access to the interface currently applied to exchange data with the IT systems of pharmacies
(Pharmalink) is managed by the existing wholesalers and the access to and conditions for use
of Pharmalink are not considered to be fair.
Enterprises which have previously tried to get a foothold in the market have indicated that it
is technically difficult – and perhaps practically impossible – to add an additional IT solution
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CHAPTER 1 SUMMARY AND RECOMMENDATIONS
to a pharmacy which is already hooked up to a VMI solution, which is one of the IT solutions
offered to customers by Nomeco. Thus, the vast majority of Nomeco’s customers use the VMI
solution. To pharmacies using a so-called VBO solution, linking up to the IT systems of
pharmacies does not represent an equally technical challenge. VBO is the solution used by the
majority of TMJ’s customers.
In practice, the IT challenges imply that many pharmacies are unable to order products
electronically from several wholesalers at the same time. This constitutes a barrier to entry,
especially for small-line wholesalers because their customers depend on ordering products
from other wholesalers in order to be able to offer a full range.
Access to (data from) the pharmacies’ IT systems gives existing full-line wholesalers insight
into vital information about the pharmacies’ stock levels, sales and product priority.
Information on the product priority of pharmacies using the VMI solution is only available to
Nomeco. Given the pharmacies’ frequent replacement of products due to the 14-day fixedprice periods, such information is crucial to the wholesalers if they are to supply the right
products to the pharmacies. In addition, the information enables the wholesalers to streamline
their own business, thereby reducing costs. Wholesalers who do not have access to the
pharmacies’ IT systems and, hence, data on sales, stocks and substitution priorities will be left
in a significantly weaker competitive position.
Delivery failures lead to
higher consumer prices and
boost medical
reimbursements
Wholesalers must report package delivery failures (back orders) to the health authorities if
the wholesaler is unable to meet demand for that package from just one pharmacy the
following day. Wholesalers report delivery failures to pharmacies in quite a lot of cases –
about 800 reports every day. This reduces the range available to consumers while at the same
time increasing costs for both consumers and the public sector due to higher consumer prices
and higher medical reimbursements, respectively, because delivery failures typically occur for
the least expensive products.
When a product is on back order with the primary wholesaler, pharmacies have only limited
incentive to procure the least expensive products from another wholesaler. In consequence,
the wholesalers have little incentive to ensure that sufficient products are in stock. Also,
wholesalers generate the lowest earnings on the least expensive products. The current market
regulation and structure encourages wholesalers to sell the most expensive products.
Due to a fairly closed
customer base, new
wholesalers can only
compete for the customers
of existing wholesalers
The regulation of the
pharmacy sector restricts
competition among
pharmacies and turn
pharmacies into passive
customers
The Danish Pharmacy Act (apotekerloven) restricts the number of pharmacies and stipulates
that only pharmacists may own pharmacies. This implies that the customer base competed for
by existing and potential wholesalers is fairly closed; therefore, new wholesalers will have to
compete directly with TMJ and Nomeco for their existing customers. That constitutes a barrier
to entry.
Moreover, despite being eased in 2015, the regulation of the pharmacy sector also limits the
scope for competing on a number of parameters. For instance, pharmacies cannot compete on
prices as both purchase and sales prices are fixed and the number of pharmacies is regulated
by means of a licensing system determining the rules of ownership and location. This restricts
competition among pharmacies.
Finally, the compensation system diminishes the incentive of pharmacies to increase revenue
as pharmacies with high revenue must pay compensation to pharmacies with low revenue.
The limited scope for competition and for generating earnings through effective operations
entails that pharmacies have limited incentive to streamline their operations, including
looking for the best and most price-effective distribution solutions. This also reduces the
incentive of wholesalers to compete for customers.
PAGE 11
Thus, our findings demonstrate that the regulation of a distribution channel in a market (here
pharmacies) has considerable consequences for competition in the other distribution
channels (here wholesalers) in the market. Therefore, regulation of one channel has an impact
on the entire value chain of a market.
Box 1.1 sums up the key findings of our analysis as described in detail in chapters 3-6.
Box 1.1
Keyfindings
Key findings of analysis:
» The distribution of medicines to hospitals and pharmacies is characterised by major differences.
» Competition in the distribution of medicines to pharmacies could be more effective.
Competition in the distribution to pharmacies could be more effective:
» In practice, suppliers of medicines to pharmacies cannot bypass Nomeco and TMJ as 99 per cent
of pharmacies use one of the two full-line wholesalers as their primary wholesaler, from whom
they buy almost all their medicines.
» Two wholesalers account for [95-100] per cent of medicine sales to pharmacies and, despite
several attempts, no new enterprises or business models have managed to establish a foothold
in the market in the past ten years.
» Suppliers hesitate to try out wholesalers using other business models than the one applied by
the full-line wholesalers.
» In Denmark, the market shares of wholesales have only changed marginally in the past ten years
and less than in comparable countries.
» Fairly few pharmacies scan the market and change their wholesaler. In the period 2010-2015, 24 per cent of the pharmacies changed their primary wholesaler each year. In the past six years,
38 per cent of the pharmacies have not considered changing their wholesaler.
» In the period 2005-2014, total average earnings of wholesalers in Denmark were higher than in
countries which, like Denmark, do not allow vertical integration between wholesalers and
pharmacies.
» However, Danish wholesale margins on identical products only vary marginally, while margins
across the range of medicines vary depending on whether the medicines are original, generic or
parallel imported products.
» Wholesale margins are lowest on the least expensive products, which may provide an incentive
to sell the most expensive products.
Limited scope for price competition:
» Pharmacy purchase prices (PPP) of medicines are the same irrespective of which wholesaler the
pharmacy uses. For this reason, it is not possible to compete on prices charged to pharmacies.
» The regulation involves that wholesalers’ discounts on medicines must be cost-based, for which
reason there is strongly limited scope for offering discounts.
» Overall, the regulation restricts competition on discounts.
» The regulation creates barriers to entry for new market players as they are unable to attract
pharmacies by competing on price/discounts.
» The way the wholesalers’ discounts are designed acts to reduce the incentive of pharmacies
to try out other wholesalers or to place orders with several wholesalers because the
pharmacies then miss out on discounts.
» The regulation means that wholesalers’ discounts must be displayed publicly (the duty to
display information).
» Nomeco and TMJ apply largely identical standard delivery and discount terms, indicating that
the duty to display information sets a standard for the discounts, the use of which as a
competition parameter is therefore limited.
» Given that the introduction of alternative combinations of price and service is rendered difficult
by the fact that prices are fairly fixed, there is only limited scope for price competition, which
constitutes a barrier to entry for new business models.
Barriers to entry:
» The 14-day fixed-price periods make great demands on the ordering of products and stock
management undertaken by the wholesalers. This creates a preference for dealing with one fullline wholesaler and furthers close collaboration between wholesalers and pharmacies.
» A key prerequisite for attracting pharmacies as customers is a well-functioning IT solution.
» It is very difficult and costly to develop IT solutions that interact with the IT systems of
pharmacies.
» The access to exchange data with the IT systems of pharmacies by buying a user licence for
Pharmalink is subject to the terms and conditions determined by Nomeco and TMJ in the
PAGE 12
CHAPTER 1 SUMMARY AND RECOMMENDATIONS
contract for such a licence.
» Potential competitors have experienced that it is currently considered technically difficult –
and perhaps practically impossible – to add an additional IT solution to a pharmacy that is
also hooked up to a VMI solution, which is the case for a large number of pharmacies.
» The licensing system under the Pharmacy Act entails a fairly closed customer base, meaning
that, by and large, wholesalers can only compete for the customers of existing wholesalers.
Pharmacies have limited incentive to be active customers:
» Given the regulation of the pharmacy sector, notably the fixed sales prices, the licensing system
and the compensation system, pharmacies have limited incentive to compete and are therefore
turned into passive customers. This reduces the incentive of wholesalers to compete for
customers.
1.3 Recommendations
The report suggests that competition in the distribution of medicines to pharmacies can be
made more effective, for example by making the regulations more expedient. This may
contribute to a reduction in the pharmaceutical prices at pharmacies.
The aim of the recommendations is to strengthen competition in the distribution of medicines
to pharmacies. Strengthened competition in the distribution of medicines may encourage
wholesalers to streamline their processes, which may lower their costs as well as lower the
profit of wholesalers and thereby reduce suppliers’ costs for the distribution of medicines.
Lower costs for distribution would enable suppliers to offer lower purchase prices to
pharmacies as the distribution costs are included in wholesalers’ purchase prices from
suppliers.
Lower purchase prices for pharmacies would lead to lower pharmaceutical prices for the
consumers. As public medical reimbursements depend on the pharmacy’s sales price of
medicines, strengthened competition in the distribution channel and in the pharmacy sector
may also lead to lower public expenditure on medicines.
The recommendations address the factors which, according to the findings of the report,
contribute to weak competition in the distribution of medicines to pharmacies.
Substantial barriers to
entry for new players
should be reduced
Firstly, the existing substantial barriers that prevent new players from initiating distribution
of medicines should be reduced. A real chance for new players to enter the market is a
precondition for effective competition in this market.
Wholesalers should be given
better opportunities to compete
on price and a greater incentive
to compete on delivery capability
Secondly, wholesalers should be given better opportunities to compete on prices charged to
pharmacies and a greater incentive to compete on their delivery capability. That would give
wholesalers a (greater) possibility of using price to attract pharmacies and of providing a
different combination of price and quality/services.
Pharmacies should have a
greater incentive to scan
the market
Thirdly, pharmacies should be given a greater incentive to actively scan the wholesale market
and purchase medicines where they receive the best value-for-money solution in terms of
both medicines and service. This would require changes in the regulation of the pharmacy
sector, which would also strengthen competition among pharmacies. These recommendations
would thus increase competition in the distribution of medicines, but also strengthen the
incentive of pharmacies to streamline operations, etc.
The Danish Competition Council’s recommendations are presented in the paragraphs below
and are subsequently summarised in Table 1.1.
The recommendations are compatible with essential health policy issues such as security of
supply, availability and impartiality in the access to medicines as well as socio-economic
issues on guaranteeing control of public expenditure on medical reimbursements and hospital
PAGE 13
medicines. The doctor would still prescribe the medicines and thus to some extent determine
the demand, and the 14-day fixed-price period (the auction system) and the generic
substitution would be maintained. Accordingly, pharmacies would still not be able to
determine what should be dispensed to the consumers. That means that pharmacies would
still have to dispense the products that are in position A. The recommendations are not
deemed to entail any direct changes in the impartiality and independence of pharmacies in
relation to the dispensing of medicines. However, the recommendation on maximum sales
prices at pharmacies is expected to result in lower average medicines prices, but would
discontinue the current priority of identical consumer prices all over the country.
The incentive of suppliers to report low prices at auctions would not be directly affected by
the implementation of the recommendations if the rules and procedures (generic substitution
and the 14-day fixed-price periods) that ensure price competition in the supply channel were
preserved.
Accessto(informationin)ITsystemsofpharmaciesshouldbemadeindependentof
wholesalers
In practice today, pharmacies have outsourced their ordering of products and stock
management to TMJ and Nomeco. Wholesalers handle these tasks by means of their IT
solutions, through which they electronically (and automatically) monitor the sale and stock
status for the items which they, in their capacity as primary wholesaler, supply to the
pharmacy. A pharmacy’s primary wholesaler thereby has a de facto monopoly on the
information on sales, stocks and priorities concerning several A products, which is necessary
to perform this task for the pharmacy.
Pharmacies basically only want to do business with wholesalers and other suppliers if
electronic ordering of products is offered, and preferably a model where the
wholesaler/supplier handles the ordering as it would be resource demanding for pharmacies
to place orders themselves.
Former wholesalers in the market call attention to the circumstance that it is technically
difficult and costly for new wholesalers to develop and provide solutions that will interact and
exchange data with the IT systems of the pharmacies and thereby manage the ordering of
products and stock management in the pharmacies.
Data exchange with the IT system of pharmacies currently requires the use of the Pharmalink
interface. Access to and terms of use of Pharmalink are controlled by the existing wholesalers.
Previous experience suggests that access to and the terms of use of Pharmalink are not
considered to be fair.
In addition, previous experience suggests that it is considered to be technically difficult and
perhaps practically impossible for a pharmacy using a VMI solution to electronically order
products from various wholesalers.
The lack of access to the IT systems of the pharmacies and to information on sales, stocks and
substitution priorities is deemed to be one of the major barriers to entry for new players in
the market.
Access to the IT systems of
pharmacies should be made
independent of wholesalers,
and it should be possible for
everybody to gain insight into
sales, stocks and priorities
It is recommended that a model be developed in which access to the IT systems of pharmacies
and the information needed for the ordering of products and stock management in the
pharmacies be made independent of the wholesalers and their IT systems. That may be done
by a third party (not a wholesaler) providing an IT solution to which all wholesalers should
have equal access, possibly in return for a licence or lease payment. If technically possible, the
interface could be set up as a module in the pharmacies’ own IT systems. In the alternative, it
is recommended that requirements be established to ensure that access to the information in
the IT systems of pharmacies is granted on equal terms to wholesalers in the market, that
PAGE 14
CHAPTER 1 SUMMARY AND RECOMMENDATIONS
compliance with the rules is subject to control and that failure to comply with the rules can be
sanctioned.
The aim of the recommendation is to make it possible for all to order products electronically
through various wholesalers if the pharmacy so wishes. At the same time, it would guarantee
that all wholesalers would have more equal opportunities to access information on stock
status and sales of the products with which they supply pharmacies as well as information on
substitution priorities. That would improve the chances of more wholesalers being able to
supply products to the same pharmacy without it causing massive additional costs for the
individual pharmacy. At the same time, that would give new players a better chance of
entering the wholesale market, which would strengthen competition in the distribution of
medicines.
Alternativepurchasingsystemsforsomeproductgroupsshouldbeexaminedfurther
Today, suppliers must report their pharmaceutical prices for 14 days at a time (14-day fixedprice periods). As concerns products belonging to the same substitution group, pharmacies
must offer consumers the product with the lowest reported price (generic substitution). All
medicines sold in pharmacies are comprised by the 14-day fixed-price period, even medicines
that are subject to no or only limited competition.
International studies show that prices of generic medicines in Denmark are relatively low,
which may be due to the fact that the auctions held at the end of the 14-day fixed-price periods
increase competition in the supply channel for this type of medicine. However, at approx. 14
per cent, generic medicines make up only a small part of pharmacies’ sales (but 51 per cent of
the total volume of pharmaceuticals sales). Conversely, prices of patented medicines, which
are subject to only very limited competition, are high relative to other countries. This indicates
that a 14-day fixed-price period is not the best instrument to increase competition in the
distribution of medicines subject to no or only very little competition.
It should be examined
whether any purchase
systems other than the 14day fixed-price period could
be applied to some products
It is recommended that the pros and cons of using purchase systems other than a 14-day
fixed-price period be examined for some types of medicine, particularly for patented
medicines and medicines outside the scope of substitution groups. Alternative purchase
models might include (long-term) tendering or price reference systems with a view to
strengthening competition in the wholesalers’ distribution of these products and pave the way
for new wholesalers and business models in the market. At the same time, the impact of
alternative models on the competition between suppliers should be taken into account.
Gainsandcostsofa14-dayfixed-priceperiodshouldbefurtherexaminedwithaview
tointroducingalongerfixed-priceperiod
The relatively short fixed-price periods of 14 days and the consequential frequent renewal of
prices and products in pharmacies contribute to the circumstance that, to an increasing extent,
pharmacies are outsourcing key tasks such as ordering of products and stock management to
full-line wholesalers. That creates very close relations between pharmacies and wholesalers.
At the same time, the system creates a preference among pharmacies for full-line wholesalers
because it increases the advantage of purchasing from only one wholesaler. The system could
thus constitute a barrier to switching wholesalers and trying out other wholesalers. That
weakens competition in the wholesale channel.
In addition, the frequent renewal of products in pharmacies involves costs for handling and
transportation of goods, etc., back and forth between wholesalers and pharmacies. High
transport costs are ultimately covered by higher pharmaceutical prices.
Possibly, a longer fixed-price period, e.g. one to three months instead of 14 days, might
contribute to even lower prices also for generic medicines. The reason is that the gain
obtained by winning the auction is increased by the length of the period, which might mean
that suppliers would fix a lower price. That might sharpen competition in the supply channel
PAGE 15
and thus provide lower prices. At the same time, a longer period would reduce transport and
logistics costs. However, there is a risk that small suppliers with surplus stocks or parallel
importers would not have the same opportunity to participate in auctions if the period is too
long. Moreover, a longer fixed-price period will entail that the exposure to competition will
occur less frequently.
It is recommended to analyse in detail whether it could be advantageous to extend the fixedprice period to more than 14 days, for example, to one to three months to give new
wholesalers a better chance to enter the market as well as to reduce costs for the
transportation of medicines. At the same time, it is necessary to focus on the impact of such an
extended period on the competition between suppliers, on prices and on the number of
competing enterprises. It should be considered whether an extended fixed-price trial period
for selected products should be conducted.
Introductionofmaximumpharmacypurchaseprice(maximumPPP)
Today, the pharmacy purchase price (PPP) is determined by the suppliers upon negotiation
with the wholesalers. The price therefore includes distribution costs. Wholesalers therefore
influence the price through the margin that they negotiate with their suppliers. The regulation
of the PPP implies that the list price at which pharmacies purchase medicines is the same
irrespective of which player (wholesaler or manufacturer) they purchase from. However,
wholesalers have the opportunity to offer cost-based discounts, which to some extent results
in differences in the actual purchase prices. As an example, pharmacies with high revenues
will in practice be granted larger discounts and thereby obtain a lower purchase price overall
compared with pharmacies with lower revenues.
The very limited possibility for wholesalers to compete on price creates barriers to entry for
new players in the market and means that wholesalers mainly compete on services offered
and the quality of logistics services. Moreover, the fixed PPP may contribute to competition on
service and thereby create close relations between wholesalers and pharmacies.
The PPP reported should be
changed to a maximum
price instead of a fixed price
It is recommended that the fixed PPP be replaced by a maximum PPP. The supplier that has
reported the lowest maximum PPP would still win the 14-day fixed-price period for an A
product, and the substitution, the reimbursement system and the competition on price among
suppliers would remain unchanged relative to today. Similarly, the pharmacy sales price (PSP)
would still be calculated on the basis of the maximum PPP reported.
The introduction of a maximum PPP would give wholesalers the opportunity to sell medicines
to pharmacies at a price lower than the maximum PPP reported. The supplier would be able to
do the same if it decided to handle its own medicines distribution. The gains involved in
purchasing from a wholesaler (or supplier) offering a lower PPP would benefit the pharmacies
in full or in part. If a maximum PSP were also introduced as recommended below, it would be
possible to pass on the gains to the consumers (and public finances).
The impartiality of pharmacies in dispensing of medicine would remain guaranteed in that, as
has been the case so far, the pharmacy’s purchasing and dispensing would be controlled by
the writing of prescriptions by doctors and the current substitution system, which would not
be affected by the maximum PPP.
The recommendation would render it possible for wholesalers to compete on price to attract
pharmacies. That could strengthen competition among existing wholesalers. Moreover, it
would make it easier for new players to enter the market as they would then be able to use
price as a competitive parameter. New players would also have the chance to offer a different
combination of price and service to pharmacies than the existing wholesalers, which would
facilitate ‘new business models’ that might add more value for the consumers.
PAGE 16
CHAPTER 1 SUMMARY AND RECOMMENDATIONS
Removaloftherequirementthatwholesalers’discountsonprescriptionmedicinesfor
pharmaciesmustbecost-based
Legislators’ aim with the regulation of the cost-based discounts has been to encourage
pharmacies to conduct their purchases in a more expedient manner (to guarantee a rational
distribution). In theory, discounts also provide an opportunity for certain competition on
price among wholesalers. In practice, however, this has turned out to be impossible due to the
duty to display information, see below.
Today, discounts are considered to be cost-based only if granted on the basis that the
pharmacies demonstrate a behaviour that implies direct cost savings for the wholesaler. As an
example, wholesalers are today unable to offer discounts based on streamlining of their own
enterprise or as an attempt to enter the market.
The requirement that wholesalers’ discounts on prescription medicines for pharmacies must
be cost-based causes a limitation of wholesalers’ possibility to compete on distribution
discounts. That limits the price competition among wholesalers. Moreover, the legal
requirement of cost-based discounts and the current interpretation/design of this might
constitute a barrier to entry for new/small wholesalers.
The requirement that
wholesalers’ discounts must
be cost-based should be
removed
It is recommended that the requirement that wholesalers’ discounts to pharmacies must be
cost-based be removed. Discounts would still have to be designed in consideration of the
4
prohibition comprised by the Medicinal Product Directive against providing pecuniary
advantages to pharmacists or doctors for the purpose of promoting sales of medicinal
products (that could affect impartiality and independence) as well as in consideration of the
prohibition comprised by the Competition Act against abuse of a (collectively) dominant
position.
Removal of the requirement of cost-based discounts would give wholesalers a better
possibility of competing on distribution discounts to pharmacies (and thus in fact on the
purchase price). That would strengthen competition among wholesalers. At the same time,
such removal could ease the access to the market for completely new players as they would be
able to use discounts to attract pharmacies.
A removal would imply that wholesalers could also offer distribution discounts based on
streamlining of their own enterprises. In addition to increased price competition among
wholesalers, such removal would thus create an opportunity for wholesalers to offer a
different combination of pharmaceutical prices and services provided to pharmacies which
could be more effective and perhaps add more value for the consumers. If the
recommendation is implemented together with maximum sales prices, this gain could benefit
consumers and tax-payers in the form of lower prices of/expenses for medicine.
The impartiality in the dispensing of medicines would remain secured by means of several
factors: The doctor would still prescribe the medicines and the 14-day fixed-price period (the
auction system) and the generic substitution would be maintained. The rules that are meant to
secure the impartiality and independence of pharmacies would thus not be affected by this
recommendation. It is also recommended to increase control as to whether the applicable
rules for distribution and sale of medicinal products are observed as well as sanctions in case
of non-compliance.
__________________
4
The Medicinal Products Directive (2001/83) of 6 November 2001.
PAGE 17
Removaloftherequirementthatwholesalersmustdisplaytheirdiscountson
prescriptionmedicines
Wholesalers’ cost-based discounts to pharmacies are subject to a so-called duty to display
information, meaning that wholesalers are obligated to publish information about such costbased discounts. Accordingly, wholesalers currently publish on their websites their standard
delivery and discount terms.
The standard delivery and discount terms used by Nomeco and TMJ are more or less identical.
That might indicate that the duty to display information sets a standard for the discounts.
As a result of the market structure with only two wholesalers handling almost all sales to the
pharmacies and selling largely identical products and services as well as the remaining market
regulation, the duty to display information may limit the incentive of the two major
wholesalers to offer better discount terms to pharmacies. That is because an improvement of
discount terms by one wholesaler will not result in more customers as its competitor can copy
the discount terms straight away, but it will typically result in lower revenue for both
wholesalers.
The transparency provided by the duty to display information could thus support the
coordination of the wholesalers’ standard delivery and discount terms and thereby limit the
use of discounts as a competitive parameter, which would then lead to higher purchase prices
for pharmacies.
The duty to display
information about
wholesalers’ discounts
should be removed
It is recommended that the duty to display information about wholesalers’ discounts on
medicines for pharmacies be removed to the effect that wholesalers must no longer publish on
their websites the discounts and discount terms offered to pharmacies.
This recommendation could increase competition based on discounts (and thus on actual
prices) among wholesalers and thereby strengthen competition in the distribution of
medicines to pharmacies. It would also reduce the barriers to entry for new players. It could
still be required that discount terms be reported to the relevant authority, currently the
Ministry of Health, or that the discounts offered to pharmacies be documented by other
means.
Incentivetosecurethedeliveryofproductsindemandshouldbestrengthenedto
minimisedeliveryfailures
A wholesaler must report a failure to deliver a product if the wholesaler is unable to meet the
demand for the product from just one pharmacy the following day. In many cases, a delivery
failure will mean that the consumer buys another, and often more expensive, product instead.
In case of failure to deliver an A product, a new and higher reimbursement price based on the
product with the second-lowest price is determined. Therefore, another consequence is
increased public expenditure on medical reimbursements. At almost 800 reports each day, the
number of delivery failures on the part of the two wholesalers is high.
The incentive of wholesalers
and pharmacies to ensure
delivery of the products in
demand should be
strengthened
It is recommended that the procedure for reporting of delivery failures be changed as the
current regulation in combination with the market structure may entail increased expenses
for both the consumers and the public sector. Today, delivery failures affect all pharmacies in
Denmark if the demand of one single pharmacy cannot be fully met. This means that today the
consequences of a delivery failure are unnecessarily far-reaching. Instead a limit could be set
as to when a (nationwide) delivery failure should be reported, or a more individual system
could be introduced in which a delivery failure affects only the pharmacies where the demand
cannot be met.
PAGE 18
CHAPTER 1 SUMMARY AND RECOMMENDATIONS
It is also recommended that wholesalers’ incentives to provide the least expensive products (A
products) be strengthened. One possibility is to impose a duty on pharmacies to purchase the
A product as long as it is available from just one wholesaler. In case only one wholesaler has
reported a failure to deliver an A product, another possibility is to make that wholesaler sell
the second-least expensive product at the price of the A product. In addition, it would be
expedient to make sure that suppliers have access to wholesalers’ stock status of the
individual supplier’s own products. That would make it easier for the suppliers to guarantee
an appropriate supply of the A products in particular. Moreover, it could be a requirement that
suppliers report their delivery capability for all packages at medicinpriser.dk and possibly
that this must be confirmed just before the beginning of the fixed-price period.
Finally, it is recommended that it be checked to a wider extent whether suppliers, wholesalers
and pharmacies comply with the rules and that sanctions be imposed in case of noncompliance with the rules.
The effects of changing the procedure could be fewer reports of delivery failures, which would
increase the product range available to the consumers. Particularly A products must be
expected to see a higher degree of availability. Altogether, it would result in lower medicines
expenses for the consumers and lower costs for public medical reimbursements.
Introductionofmaximumpharmacysalesprices(PSP)totheconsumers
Today, the pharmacy sales prices (PSP) to consumers of prescription medicines are
determined by the Danish Medicines Agency (Lægemiddelstyrelsen). The PSP is the same for all
pharmacies. That means that the consumers will pay the same price for pharmacy-only
medicines irrespective of their location in Denmark. Accordingly, pharmacies cannot use sales
prices to attract customers.
Purchase prices for pharmacies are fixed, and pharmacies cannot compete on price relative to
the consumer, and those factors limit the pharmacies’ incentive to scan the wholesale market
and to place their orders where they will obtain the best combination of service and price.
That makes it difficult for new wholesalers to enter the market as the pharmacies have limited
financial incentives to scan the wholesale market.
The preconditions for creating competition among wholesalers are most advantageous if the
customers, meaning the pharmacies, actively scan the wholesale market and purchase
medicines where they obtain the best value-for-money solution (in terms of both medicines
and service).
Maximum pharmacy sales
prices (PSP) should be adopted
instead of fixed sales prices
Therefore, it is recommended that maximum sales prices be adopted at pharmacies instead of
fixed sales prices. That would give pharmacies the opportunity to sell medicines to consumers
at a price that is lower than the fixed maximum sales price.
The supplier who has reported the lowest (maximum) PPP would still win the 14-day fixedprice period for an A product that must be available to consumers at the pharmacy. The
system of substitution and reimbursement would also continue in its current form, and the
price competition among suppliers to win the fixed-price period would be preserved. The
maximum PSP is therefore deemed to entail lower average consumer prices compared with
today, but, unlike today, prices might differ from pharmacy to pharmacy and across the
country.
As it is recommended that maximum pharmacy purchase prices (maximum PPP) be adopted
at the same time, the benefit of pharmacies purchasing medicines from the wholesaler offering
the lowest price would also benefit consumers and taxpayers.
The impartiality of pharmacies is deemed to remain guaranteed in that, as has been the case
so far, the pharmacy’s purchasing and dispensing would be controlled in part by the writing of
PAGE 19
prescriptions by doctors and in part by the current substitution system, in which pharmacies
have a duty to offer the least expensive product to the consumers. None of these factors would
be affected by the adoption of a maximum PSP, and impartiality and independence at
pharmacies would thereby the preserved.
Introductionofalessrestrictiverightofestablishmentforpharmacies
The regulation of the licensing system for pharmacies lays down rules on ownership and
location. The rules include that only pharmacists may own pharmacies and that only a limited
number of pharmacy licences exist. That limits the group of owners as well as the possibility of
establishing pharmacies.
The rules of the licensing system on quantity limitation and ownership constitute barriers to
entry for new wholesalers in the market as the wholesalers’ customer base is frozen by the
regulation. New wholesalers would therefore have to compete with TMJ and Nomeco for their
existing customers.
The licensing system limits the incentive of individual pharmacies to perform streamlining
and renewal procedures. That means less focus on cost minimisation, including purchase
prices.
Therefore, pharmacies should be given a greater incentive to actively scan the wholesale
market and purchase medicines where they obtain the best value-for-money solution in terms
of both medicines and service. That would lower the barriers to entry for new wholesalers.
The pharmacy licensing system
should be adjusted to create a
less restrictive right of
establishment
It is recommended that the wholesalers’ customer base be more open by adjusting the
pharmacy licensing system to create a less restrictive right of establishment.
Firstly, it is recommended that it be made possible for others than pharmacists to own
pharmacies (however, all pharmacies must have an affiliated responsible pharmacist) and,
secondly, it is recommended that the limitation on the number of pharmacies (i.e. the number
of licences) be removed.
This recommendation would primarily strengthen competition among pharmacies. In
addition, the recommendation would contribute to a reduction of the barriers to entry for new
wholesalers in the market by opening up the customer base and for new forms of distribution.
Depending on the agreement with the wholesaler, more pharmacies, branches and outlets
might entail higher distribution costs. The size of the market for prescription medicines is
expected to remain unchanged with this recommendation as the doctor would still prescribe
the medicines.
Adjustmentofthedesignofthecompensationprogrammeofpharmacies
The compensation programme is a financial compensation of pharmacies. The purpose is to
ensure a financial basis for the operation of pharmacies in peripheral areas. The programme
implies that pharmacies with relatively high revenues pay a fee, whereas pharmacies with
lower revenues receive a contribution.
Pharmacies generating relatively low revenues will therefore always be guaranteed a certain
financial foundation and thus have limited incentive to compete, expand and increase sales as
they would lose all or part of a contribution otherwise obtained. Comparably, pharmacies
generating relatively high revenues will have limited incentive to increase their sales, for
instance by gaining market shares, as they would then have to pay a higher fee. This minimises
the incentive for pharmacies to compete and create higher revenue, which may contribute to
reducing competition in the wholesale market.
The lack of competitive pressure from pharmacies limits wholesalers’ incentive to actively
compete for customers and may constitute a barrier to entry for new wholesalers.
PAGE 20
The compensation programme
should be adjusted to the effect
that the pharmacies with the
highest sales would no longer
finance the pharmacies with
the lowest sales
CHAPTER 1 SUMMARY AND RECOMMENDATIONS
It is recommended that the current layout of the compensation programme be adjusted to the
effect that the pharmacies generating the highest sales would no longer finance the
pharmacies generating the lowest sales.
To continue to guarantee proper geographic access to medicine all over Denmark, selected
pharmacy locations that could otherwise be difficult to run profitably would be covered
through invitations to tender for pharmacy operation. The costs involved could be financed
through the fees payable by all pharmacies to the Danish Medicines Agency. In that way, the
programme would be financed broadly by all pharmacies/players (and thus principally by all
pharmacy customers).
Adjusting the current cost-based compensation programme would increase the incentive of
pharmacies to focus on revenue. That applies both to pharmacies with high revenues because
they would no longer be subject to partial set-offs and to pharmacies with low revenues
because they would no longer receive contributions through the system.
That would give pharmacies a greater incentive to purchase their products where prices are
lowest. It would strengthen wholesalers’ incentive to compete on price and also lower the
barriers to entry for new wholesalers in the market.
Adjustmentoffuturegrossprofitframeworkofpharmacies
The total gross profit of pharmacies is agreed by the Danish pharmacists association
(Danmarks Apotekerforening) and the Ministry of Health. The gross profit framework makes
up the basis for the Danish Medicines Agency’s determination of pharmacy sales prices (PSP)
to consumers. The PSP should be adjusted so that the agreed gross profit framework would be
observed. Altogether, pharmacies could thus earn neither more nor less than agreed under the
gross profit framework.
Today, the cost-based discounts of pharmacies are comprised by the gross profit framework in
that half of the cost-based discounts are used to lower the PSP, whereas pharmacies are
allowed to keep the other half. This allocation is meant to ensure that pharmacies have an
incentive to purchase their products where they receive the best discounts and to
simultaneously pass on some of the gains to the consumers.
In continuation of the recommendations on a maximum PPP and the removal of cost-based
discounts, it is therefore also essential to ensure that pharmacies have an incentive to
purchase their products where it best pays off from a financial perspective.
The gross profit framework
should be designed so as to
allow pharmacies to keep a
sufficient share of a financial
gain from purchasing products
at low prices
Therefore, it is recommended that the future gross profit framework of pharmacies allow for
the pharmacies themselves to keep a sufficient share of the financial gain from purchasing
from a wholesaler with lower prices/higher discounts.
Allowing pharmacies to keep a larger share of the financial gain from purchasing from the
wholesaler offering the lowest prices would increase the incentive of pharmacies to scan the
wholesale market for the best possible combination of prices of medicines and service. That
would give wholesalers a greater incentive to compete on price and would also lower the
barriers to entry for new wholesalers in the market.
Table 1.1 offers a complete overview of the Competition Council’s recommendations of how to
strengthen competition in the distribution to pharmacies. Moreover, the table summarises
whether the individual recommendation would reduce the barriers to entry for new
wholesalers, improve the possibility of price competition and increase the incentive to ensure
delivery capability and/or strengthen the incentive of pharmacies to scan the wholesale
market. The recommendations would have the biggest possible impact on the wholesale
market and prices of medicines if implemented collectively as one package.
PAGE 21
Table 1.1RecommendationsmadebytheCompetitionCouncilandimpactoftherecommendations
Recommendation made by the Competition Council
Impact of recommendation
Strengthens
existing
wholesalers’
Reduced
possibility of
barriers to
competing on
entry for new
price and the
wholesalers
incentive to
ensure delivery
capability
Access to (information in) IT systems of pharmacies should be made independent of wholesalers so that
all wholesalers would have equal access to the IT systems of pharmacies.
X
Alternative purchasing systems for some products should be examined further so that selected products
could be purchased through long-term offers or price reference systems.
X
Gains and costs of a 14-day fixed-price period should be further examined to determine whether it
might be advantageous to extend the fixed-price period.
X
Maximum pharmacy purchase prices should be introduced instead of fixed purchase prices.
Strengthens
the incentive
of pharmacies
to scan the
wholesale
market
(X)
X
X
X
The requirement that wholesalers’ discounts on medicines to pharmacies must be cost-based should be
removed so wholesalers could customise discounts according to their business model.
X
X
X
The requirement that wholesalers must display their discounts on prescription medicines should be
removed.
X
X
X
X
X
Incentives to secure the delivery of products in demand should be strengthened to minimise delivery
failures
Maximum pharmacy sales prices to consumers should be introduced instead of fixed sales prices.
A less restrictive right of establishment for pharmacies should be adopted so persons other than
pharmacists may own pharmacies and pharmacy owners may determine the number of pharmacies
themselves, etc.
X
X
X
The current layout of the pharmacies’ compensation programme should be adjusted so the pharmacies
with the highest revenue would not be financing the ones with the lowest revenue.
X
The future gross profit framework of pharmacies should allow for pharmacies to keep a significant part
of the gain from lower prices/larger discounts.
X
1.4 Structureofthereport
Chapter 2 of the report provides an introduction to the pharmaceuticals market in general.
Initially, para. 2.2 introduces the currently applicable health policy issues in the market as
well as the issue of controlling public expenditure. Subsequently, paras. 2.3-2.6 introduce the
three distribution channels in the market: suppliers, wholesalers and the two retail sales
channels (pharmacies and hospitals), with a particular focus on wholesalers.
Chapter 3 analyses the competition in the distribution of medicines to pharmacies and
hospitals on the basis of a number of competition indicators. The chapter includes analyses of
entry into and mobility in the wholesale market as well as the income and profit of
wholesalers.
PAGE 22
CHAPTER 1 SUMMARY AND RECOMMENDATIONS
Chapters 4-6 put focus on a series of factors that affect competition in the distribution of
medicines to pharmacies. The factors in question are barriers preventing new wholesalers
from entering the market (Chapter 4), wholesalers’ possibilities of and incentives to compete
on price and delivery capability (Chapter 5) as well as the incentive of pharmacies to be active
customers in the wholesale market (Chapter 6). The chapters also present recommendations
as to how competition in the distribution of medicines to pharmacies can be strengthened.
Annex 1 comprises a presentation of the approach to the analysis and the methodology and
data used, whereas Annex 2 offers a brief introduction to the organisation in other countries
with which Denmark normally compares itself. Experience from other countries is
continuously included in the analysis. Finally, Annex 3 provides a description of veterinary
medicines. Annex 4 comprises a list of references.
For the purpose of the report, an appendix has also been composed, which includes the
questionnaire survey conducted by the Danish Competition and Consumer Authority among
the pharmacies as well as the survey’s distribution of responses.